Source: Late Late Post Author: Li Zinan
“Late LatePost” exclusively learned that Tesla's latest planned plant in Nuevo Leon, Mexico, is scheduled to be completed and put into operation in the first quarter of 2025, and Tesla has synchronized the new schedule to parts suppliers, which is 1-2 quarters later than expected by the market. People close to Tesla's suppliers claim that Tesla had previously underestimated how difficult it was to build a factory in Mexico.
Combining information from multiple Chinese suppliers, they received a clear request from Tesla: if they fail to complete localized production in Mexico by 2025, not only will it be difficult to obtain orders for new Mexican factories, but they may also lose orders originally exported to Tesla's US factory.
$Tesla (TSLA.US)$There was no additional help to suppliers that traveled to Mexico to build factories, nor did they promise that they would definitely give orders to Chinese companies going overseas to Mexico. However, one supplier said that for defined partners, Tesla's purchase prices in Mexico are 18%-20% higher than their orders in China. The supplier estimates that the production cost of the same component in Mexico is about 15% higher than in China, and that going to Mexico to build a factory can increase gross profit margin by about 3 points.
Tesla's Mexico plant will have an annual production capacity of 2 million vehicles, making it currently the largest automobile factory in the world with design production capacity. The Mexican media “Reforma” said the factory has invested 10 billion US dollars and plans to employ about 7,000 workers, covering an area of 25,000 mu.
This is an opportunity that Chinese auto suppliers that have already entered the special chain or want to enter the special chain do not want to miss. With Tesla's new plant, more companies in the Chinese automobile industry are aiming to make money overseas.
Go to Mexico to rebuild the Shanghai factory
Tesla CEO Musk stubbornly believes that the only reason preventing consumers from buying Tesla is that Tesla cars are not cheap enough. The main way for Tesla to gain growth is to manufacture more competitive cars at lower costs and higher efficiency.
Prior to the Mexican plant, the Shanghai plant was Tesla's most efficient factory, producing the largest and cheapest Tesla cars. The Shanghai plant produced 710,000 vehicles last year, accounting for 54% of Tesla's global production. You only need 231,900 yuan to buy a Tesla Model 3 in China, 3699 million US dollars (about 266,900 yuan) in the US, and 39,900 euros (about 314,000 yuan) in Germany.
Musk attributes the success of the Shanghai plant to the help of the Chinese government, China's hard work and cheap labor costs, and a localized supply chain. 95% of the Model 3 parts manufactured at the Shanghai factory are produced in China.
With the exception of a small number of high-end chips such as autonomous driving chips, Tesla can buy all components in China. The Yangtze River Delta region has collected more than 50% of China's power batteries, motors, battery control systems, and automotive electronics production capacity. The vast majority of auto parts factories are within 300 kilometers of the Shanghai factory. The batteries produced in the Ningde Era took less than 6 hours from being put off the line in Liyang, Jiangsu to the car, and the direct distance from Bosch's braking system factory in Suzhou to the Shanghai factory was less than 150 kilometers. This allows Tesla to produce cars with a very low inventory of parts. The factory entrance and the container cars on the road are Tesla's warehouses.
Beginning in the second half of last year, Tesla plans to move this supply chain to the Mexican state of Nuevo Leon.
The planned annual production capacity of Tesla's new plant in Mexico is 2 million vehicles, 2.85 times the production capacity of the Shanghai plant last year (700,000 vehicles). Tesla will use the latest manufacturing technology to manufacture two new models and some auto parts at a price of about 25,000 (about 175,000 yuan) at the Mexican plant. This is Tesla's cheapest car so far. It will help Tesla achieve the next stage of large-scale expansion. It is an important step for Tesla to achieve the goal of producing 20 million cars per year in 2030.
The reason this important new plant landed in Mexico is related to the “Inflation Reduction Act” enacted by the US last year. The bill provides a tax relief of 7,500 US dollars/vehicle for electric vehicles that comply with the “North American Rules of Origin”, provided that the parts of a new energy vehicle worth 75% or more are produced in North America, that is, the US, Canada, and Mexico, and that vehicle assembly must be completed in North America; more than 40% of the raw materials and 50% or more of the components of the power battery must be manufactured in “the US and its trading partner countries.” This scope includes more than 20 countries including Mexico, Canada, and Japan.
Tesla's Mexico plant is more than 200 kilometers from the U.S.-Mexico border and 600 kilometers from Tesla's Texas plant. The two plants will share part of the supply chain.
A number of Tesla supplier sources told “Late Late Post” that Tesla began negotiating supply chain orders for the Mexican factory with Chinese suppliers last year, provided that parts suppliers achieve localized production in Mexico. American car companies such as GM and Ford have placed the same demands on Chinese suppliers who want to supply their North American plants.
According to incomplete statistics from “Late Late Post”, currently more than 20 Chinese suppliers of Tesla have announced plans to build a plant in Mexico or have already built a factory in Mexico.
According to information, Tesla has told some suppliers that it is already cooperating with that if local production in Mexico is not achieved by 2025, orders currently exported to Tesla's California and Texas factories in the US may be lost.
Attractiveness is more profit. A supplier revealed that Tesla's purchase prices in Mexico are 18%-20% higher than its orders in China. According to their estimates, compounded by rising labor and raw material costs, the production cost of the same component in Mexico is about 15% higher than in China, and going to Mexico to build a factory can still increase gross profit margin by about 3%.
Chinese companies that have yet to enter Tesla's supply chain also want to seize new business. One supplier said that Tesla did not promise all existing suppliers that they would purchase: “The entire bidding process is market-based. Some companies that are not in Tesla's supply chain are also planning to go to Mexico to try to enter the Tesla supply chain.”
Tesla also needs these Chinese suppliers. Like Apple, Tesla will help suppliers improve manufacturing technology. In the process of serving Tesla, Chinese suppliers have also developed their own supporting R&D capabilities. They not only provide standard products, but also carry out research and development of components and manufacturing processes according to Tesla's needs. For example, Tesla and Lijin Group collaborated to develop a 6,000-ton integrated die-casting machine in 2019. Tesla has spent energy cultivating an efficient supply chain in China and cannot be replaced in a short period of time.
Going to Mexico is risky, but Tesla's foreseeable growth is more tempting
To build a factory in Mexico, Chinese companies need challenges such as huge capital expenses, higher labor costs, worse infrastructure, and a very different culture.
A person close to the supplier revealed that the hourly wage of Mexican manufacturing workers in Nuevo Leon is about 4.8 US dollars, slightly higher than China's 4.5 US dollars. Some Chinese suppliers that have built factories in Mexico and trained workers believe that Mexican manufacturing workers are not as skilled as those in China, and that they have high overtime pay.
The Chinese automobile manufacturing industry generally has a two- to three-shift system. Each person works 8 hours a day in the three-shift system, and each person works 12 hours a day in a two-shift system. Companies are required to pay 4 hours of overtime. However, in Mexico, you pay 200% of your hourly wage for 2 hours of overtime and 300% of your hourly wage for 4 hours of overtime. “If you count all kinds of subsidies and strong trade unions, the overall labor cost will be more than 10% higher than in China.” One vendor believes that a supplier with a high automation rate is better suited to go to Mexico.
Local transportation in Mexico also poses challenges for suppliers. A supplier source said that during the COVID-19 pandemic, some Chinese companies that built factories in Mexico couldn't find enough transport trucks; in the end, they could only choose air freight to send parts to the US. Currently, most suppliers choose to build their own logistics networks after going to Mexico to build factories. The common practice in China is to look for outsourced logistics suppliers.
However, most of Tesla's Chinese suppliers still choose to build factories in Mexico; they believe that the growth of Tesla's Mexican plant is predictable and unprecedented. Even without being able to supply Tesla, Mexico is still a blue ocean.
Mexico is the 4th largest producer of auto parts and the 6th largest automobile manufacturer in the world. Large traditional car companies such as GM, Nissan, Volkswagen, and Ford all have production bases in Mexico. Currently, Mexico is still the largest importer of parts to the US, accounting for more than 30% of imports. However, Mexico currently lacks a complete electric vehicle supply chain, and suppliers can look for customers other than Tesla locally. The number of electrification, thermal management and intelligent suppliers required for electric vehicles accounts for only 2.2% of the total automotive supply chain in Mexico, compared to 8.8% in China.
Most of the more than 20 Chinese car suppliers that already have or are planning to build factories in Mexico are located in Nuevo Leon, where Tesla's Mexico plant is located, and the neighboring state of Coahuila. These two states are close to the U.S.-Mexico border and are themselves the center of the Mexican automobile industry. Before Tesla, Kia and GM had already built automobile factories in these two states.
Before Tesla announced its new plant in Mexico, some Chinese auto suppliers had already gone overseas to Mexico and had experience operating factories there. For example, Junsheng Electronics, which produces automotive electronics, built a plant in Mexico in 2010 to supply GM and other customers. Rongtai Co., Ltd., which produces aluminum alloy castings, built a plant in Mexico in 2017.
More companies are the ones that are now following Tesla's new entry into the Mexican or North American markets. Some of them have experience going overseas to other regions, such as Huayu Auto for car interiors and Wencan Co., Ltd. for steering systems.
However, the supplier that had the greatest impact on Tesla's costs, the power battery company Ningde Era, has abandoned plans to build a factory in Mexico. It is likely that it will try to use technology licensing to cooperate with Tesla in the US, similar to the cooperation between the Ningde Era and Ford: the Ningde Era provides products and manufacturing technology, charges technical licenses and service fees, but does not invest in the construction of the factory and does not own the factory. The Ningde Era's joint venture plan with Ford is now progressing slowly, and there is greater uncertainty about its cooperation with Tesla in North America.
The Mexican automobile industry chain rose during the oil crisis in the 1970s, when a large number of Japanese automobile and parts companies went to Mexico to build factories. At the moment of the wave of new energy vehicles, another group of Chinese companies are following Tesla to build factories in Mexico. This is the best opportunity China's automobile supply chain has ever encountered to make money globally.
edit/lambor